Fast-casual chain Potbelly Sandwich Works (PBPB) went public Friday, and investors swarmed the stock pushing shares up by as much as 135% from its offering price. This is the second time this year we have seen huge initial interest in restaurant chains, with Noodles & Company (NDLS) seeing the same initial reaction when it went public back in June.
The fast food industry is going through major changes. There are several factors applying pressure to traditional fast food chains such as McDonald's (MCD) and Wendy's (WEN), which is a major reason why investors are getting so excited about public offerings from new chains such as Potbelly and Noodles & Company.
There are no Potbelly locations near me, but downloading a menu online it looks like most of its items are priced in the range of what you can expect to find at a traditional fast food restaurant, but the menu items definitely appear to be healthier in nature. It's "signature" and "favorites" sandwiches are priced at less than $6, so you can expect to walk out paying about the same as you would for a less-healthy value meal at any traditional fast food restaurant.
With healthier menu options, and prices in line with what you can expect to pay at McDonald's, it is becomes easy to understand why investors are so eager to jump into the stock on its opening day.
The primary threat to traditional fast food is that people's diets are changing. The obesity problem that has plagued the U.S. has resulted in a more health-conscious consumer, and has lead places like McDonald's work on creating healthier menus.
As people move to a more healthy diet, they have shown a willingness to spend a little extra to guarantee a healthier meal. This is why burrito chain Chipotle (CMG) has been so strong. It costs a little more to eat at Chipotle versus a fast food burger chain, but customers are willing to pay the extra money because they know they are getting a healthier meal.
Fast food chains are working to improve their menu, but it will be hard to change consumers' mindsets and it is also creating another problem… longer waits for food.
According to a recent report conducted by QSR Magazine, the time people are waiting for food at the drive thru is increasing. The study pointed out McDonald's, where drive-thru waits are the longest they have ever been in the 15 years that QSR has conducted the study.
The problem is that fast food chains are trying to revamp their menus with new and healthier offerings to compete with the likes of Panera Bread (PNRA) and Chipotle. This is leading to longer waits, and poses a significant risk to fast food chains which can do as much as 60% to 70% of their business at the drive thru window.
The basic premise of fast food is that customers can get their food fast. If that is no longer the case, then what is the primary reason for choosing fast food over something else?
Perhaps you could argue that people will continue to frequent fast food chains because of their low prices, but that argument too is no longer as strong. As we pointed out earlier this week, there has been a significant rise in prepared food sales at convenience stores, which offer foods at or below the prices found at fast-food chains.
The fast -food industry is changing rapidly. How it will look in a few years is anyone's guess… but the recent IPO success of smaller chains such as Potbelly is a clear indicator that Wall Street believes fast food burger chains may not be leading the industry in the not-too-distant future.
Michael Fowlkes is a financial writer who has been with the Fresh Brewed Media family since 2004. Over the course of his tenure with Fresh Brewed Media, he has worn many hats, including portfolio manager, options analyst, and writer. Michael received his undergraduate degree from Virginia Tech in Accounting and got his start in finance working as a stock trader for six years at Chase Investment Counsel in Charlottesville, Va.